By Ann Heffron, CFA, CPA

Chesapeake Financial Shares, Inc. (CPKF) reported record first quarter diluted EPS of $0.64 that was a nickel, or 8%, better than our $0.59 estimate, driven by strong growth in the merchant card, cash flow, and mortgage banking businesses.

Click here to download of free copy of the CPKF research report: CPKF 5-13-13

Relative to the year-ago quarter, net earnings climbed 14% to $2.1 million, while 2013’s first quarter diluted EPS advanced 12% from the $0.57 posted in 2012’s first quarter due to a greater number of shares outstanding.

Sequential net income surged 59% from fourth quarter’s $1.3 million and diluted EPS jumped 61% from the $0.39 posted in the fourth quarter of 2012.

Net interest income shed 1% year over year to $5.8 million ($0.1 million lower than our estimate), as 6% growth in loans and receivables outstanding was partially offset by a net interest margin that we estimate was below the 4.67% earned in the year-ago quarter.

Noninterest income advanced $0.6 million, or 20%, year over year to $3.8 million ($0.3 million above our estimate), primarily the result of strong gains in merchant card income (up $0.2 million, or 19%) as the Company added new clients, miscellaneous income (up $0.2 million, or 21%) reflecting strong growth in mortgage banking, and cash flow income (up $0.1 million or 13%) due to product line expansion.

The loan loss provision decreased 33% to $0.1 million (below our $0.15 estimate). Loan loss reserves fell $0.7 million from $6.5 million (1.84% of loans) year over year and $0.5 million sequentially from $6.3 million (1.69% of loans) to $5.8 million (1.56% of loans) as of March 31, 2013.

CPKF recently hiked its quarterly dividend by 9% to $0.12, following a 10% increase earlier in 2012. Notably, CPKF has increased the annual dividend payment every year for the past twenty years since 1991.

In December, CPKF completed a tender offer to repurchase $1.5 million of company stock (about 2% of outstanding shares) at $18.50 per share.

We note that American Banker recently ranked CPKF 17^th (down one notch from 16^th a year ago) out of all banks nationally with less than $2 billion in total assets, which includes approximately 6,000 banks, and #2 of all banks in Virginia. This ranking was based upon three-year average returns on equity, which for Chesapeake Financial was 14.10%. The Company has steadily risen through the rankings in the past five years, reflecting its solid financial performance during this difficult banking environment.

Chesapeake Financial Shares, Inc. is a bank holding company headquartered in Kilmarnock, Virginia, with $644 million in total assets at March 31, 2013. CPKF is predominantly a small business lender with 12 branch offices that serve customers in the eastern region of Virginia between the Potomac and James Rivers. These offices are located in Kilmarnock, Lively, Irvington, Mathews, Hayes, and Gloucester, with five branches in Williamsburg. CPKF, which began as Lancaster National Bank on April 13, 1900, has a long history and strong ties with the communities it serves. In addition, CPKF opened a commercial loan production office in Richmond, Virginia in mid-August 2011.

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